COMMENTARY No. 46

a CANADIAN SECURITY
INTELLIGENCE SERVICE publication

ECONOMIC ESPIONAGE (II)

July 1994

Unclassified

Editors Note:

In his second and final paper in a series, the author (Mr. Samuel
Porteous, a Strategic Analyst in the Analysis and Production Branch of CSIS)
moves the discussion of economic espionage forward from his earlier
Commentary #32, and provides an
overview and analysis of the current state of the debate on economic espionage.

Disclaimer: Publication of an article in the COMMENTARY
series does not imply CSIS authentication of the information nor CSIS
endorsement of the author's views.

Introduction

Despite the high profile that the topic of economic espionage has enjoyed
over the past few years, little progress appears to have been made in the actual
analysis of the issue. Most treatments of the subject run through the same
questions and arguments in much the same manner. What is needed is a critical
analysis of these arguments and an examination of newer issues not yet
introduced into the discussion.

Definitions

Surprisingly, the examination of economic espionage continues to be plagued
by a lack of coherent terminology. Many commentators speak of economic espionage
as if it were economic intelligence or industrial espionage, and economic
security as if it were something a country could obtain by locking its doors.
Much of the confusion can be avoided by defining some key terms.

Economic security is the maintenance of those conditions necessary
to encourage sustained, long-term relative improvements in labour and capital
productivity and thus a high and rising standard of living for a nation's
citizens, including the maintenance of a fair, secure and dynamic business
environment conducive to innovation, domestic and foreign investment and
sustainable economic growth.

This is a broad goal sought by all governments. Clearly, the intelligence
community's role in achieving this goal is secondary to that of the private
sector and even government actors responsible for commercial/industrial policy.
Yet the secondary nature of the intelligence community's role does not render it
unimportant. It is in assisting in the "maintenance of a fair, secure and
dynamic business environment" that the intelligence community's
contribution to economic security is felt.

Economic intelligence is policy or commercially relevant economic
information, including technological data, financial, proprietary commercial and
government information, the acquisition of which by foreign interests could,
either directly or indirectly, assist the relative productivity or competitive
position of the economy of the collecting organization's country.

While economic security is a major governmental goal, economic intelligence
is an important element in the attainment of that goal. It should also be
acknowledged that the vast majority of economic intelligence gathered by
businesses or governments is derived legally from open sources, involving no
clandestine, coercive or deceptive methods. The collection and dissemination of
information in this manner, either through visiting students, scientists or
business people, is rightly seen as a beneficial element of a free and open
society, crucial to technological and economic development. In a minority of
cases, however, economic intelligence is obtained by more intrusive techniques
with less than desirable results. This narrows the discussion to the subset of
economic intelligence-gathering of most concern to the intelligence community:
economic espionage.

Economic espionage is the use of, or facilitation of, illegal,
clandestine, coercive or deceptive means by a foreign government or its
surrogates to acquire economic intelligence. (The acquisition of an actual piece
of technology is assumed to be covered by this definition, in that actual
objects can be considered physical embodiments of technological information and
just another means, not unlike the printed word, to transmit information.)
Beyond the acquisition of information or technology by a government or its
surrogates, other activities engaged in by different actors are relevant to this
analysis.

Industrial espionage is the use of, or facilitation of, illegal,
clandestine, coercive or deceptive means by a private sector entity or its
surrogates to acquire economic intelligence.

Until quite recently these terms would have provided a sufficient basis to
discuss the interaction of intelligence and commercial interests. Recent
statements by the Director of the CIA, however, have indicated that the American
intelligence community's interest in questionable business practices is not
confined to the narrow matter of economic espionage. An American policy tasking
the CIA to deal with some other "sharp practices" by foreign firms
inevitably forces non-American intelligence services to confront their approach
to these same issues.

Sharp practices are the use of illegal, clandestine, coercive or deceptive
means by a foreign government or entity intended to benefit the economic
interests of the perpetrator.

This broad category includes not only economic espionage but other
questionable practices such as bribery and sabotage. These latter techniques
should not be considered economic espionage, since they do not necessarily
require a link to government or directly involve the acquisition of information
or technology belonging to a foreign state or personcorporate or
otherwise. For example, in many cases the bribery which concerns the Americans
simply involves a non-American bribing another non-American outside the United
States. No American economic intelligence is obtained. Any attempt to include
activities of this nature as part of the definition of economic espionage rather
than the broad category of sharp practices only adds to the confusion.

Economic espionage: perception & prevalence

Everyone's a victim

Reading North American coverage of economic espionage, one could be forgiven
for thinking the New World was besieged by the corrupt practices of the Old
World and the mysterious East. North American economic interests are typically
presented as the victim, never the beneficiary, of these practices. Reports
even include earnest discussions of "cultural and ethical qualities"
unique to North American business that render their economies more vulnerable to
economic espionage than those of their counterparts in Europe or Asia.

Not surprisingly, this view is not widely shared outside North America.

German articles talk of American or French use of signals intelligence
(SIGINT) capacity to eavesdrop on sensitive commercial transactions.

Reuter's stories from Britain make similar claims involving a
middle-eastern power and a multi-billlion dollar arms deal the UK was bidding
on.

China has also warned its people about foreigners seeking economic
intelligence. (In this instance the Chinese government felt 1000-year-old
remedies and ancient healing techniques required protection.)

In June of 1994, Russian presidential aide Yuriy Baturin accused Asian
countries, particularly China and North Korea, of economic espionage.
According to Baturin, the theft of technological and commercial secrets from
Russia has been exacerbated by Russian economic conditions.

Finally, even much-abused France was able to put together a major story
whose title translates "The Pillage of France", telling the now
familiar tale of how its economic interests are being injured by spies
facilitated or directed by foreign governments with lower ethical standards.

What is of particular interest in examining the foreign analysis of this
issue is the blasé manner with which accusations against other countries,
often allies, are made. This, despite most countries' repeated and vocal
denials that they engage in the activity.

The debate over the impact of economic espionage

Commentary #32 and
other analyses generally dealt with the issue of the significance of economic
espionage through extrapolation from known occurrences; i.e., claims of hundreds
of millions of dollars lost due to the theft of new product plans, or 10 years'
know-how being stolen overnight through a breach in computer security. Many
organizations, both government and private, have attempted to gauge the impact
of this activity through surveys, with varying degrees of success and
credibility. At this stage it seems clear that policy-makers are unlikely to
obtain abundant hard data regarding the impact and significance of economic
espionage. For reasons discussed in the previous Commentary, economic
espionage, similar to computer and financial fraud, is simply not an activity
conducive to the production of this type of information.

An analogy can, however, be drawn between the impact of economic espionage
on a country's economic interests and the impact of more familiar espionage on
its military security or political interests. In this way, economic espionage
could be said to be as important to a country's economic interests as more
familiar types of espionage are to its more traditional political and security
interests.

Clearly, espionage plays a minor role in the great volume of international
relations conducted between nations. For the most part the impacts of
espionage-related activities on a country's political or security interests are
almost never acknowledged and rarely disclosed. This, however, is not the same
as saying they are either exceptionally rare or insignificant. Recent reportage
concerning alleged assistance provided by the American intelligence community to
Boris Yeltsin on orders from then President George Bush during the 1991 Soviet
coup dramatically demonstrates the potential impact and significance of some
espionage activity. In this instance the alleged assistance was reportedly a
crucial element of Yeltsin's ascension to power. In much the same manner,
economic espionage, while not influencing the vast bulk of economic exchanges,
has the potential to have dramatic impacts in some cases, such as influencing
the awarding of a major contract.

Intellectual property infringement

The difficulty in estimating the financial impact of economic espionage has
also encouraged an unfortunate tendency among some media and government
officials. Unable to produce more concrete figures, they resort to equating
costs due to economic espionage with costs relating to all incidents of
intellectual property (IP) infringement. Articles on economic espionage cite
global estimates of costs due to IP infringement as evidence of the severity of
the economic espionage problem. This is not a good measure. IP infringement
costs, such as those due to copyright or trademark infringement, can easily be
projected into the billions, but in the vast majority of cases, these
infringements have nothing to do with economic espionage. The use of these
estimates, highly subjective to begin with, needs to be examined closely.
Economic espionage is not trademark or copyright infringement engaged in by
private sector entitiesactivities from which the bulk of these costs are
derived. Private sector copyright or trademark infringement would, however,
qualify as part of the previously mentioned "sharp practices"
category. If these figures are to be used in future in this manner, some effort
should be made to identify what components of these estimates actually relate to
what has been defined as economic espionage.

Is it efficient?

Another argument often presented in North American analysis is that
intelligence obtained through economic espionage would be "tactically
useless" for a number of reasons. Typically, the barriers to potential
efficiency are related to an intelligence agency's lack of knowledge of the
subject area and to problems associated with the dissemination of intelligence
once acquired. These arguments tend to come from individuals who at the same
time argue for or accept the need for government to defend against economic
espionage engaged in by other governments. It is difficult to support these
points simultaneously: if economic espionage is "tactically useless",
it is similarly useless to foreign governments that practice it, and thus need
not be defended against.

Knowledge

As noted, lack of direct knowledge of a certain business or its technology
has been cited as a significant obstacle to intelligence services engaging in
economic espionage. Yet during the Cold War, intelligence services spent
significant amounts of time and energy, with some success, trying to obtain
intelligence on various complex military technologies of which the case officers
would not have had a profound knowledge. If intelligence services were trusted
to obtain such information, a shift of focus to complex commercial technologies
and intelligence would not be unthinkable. The same techniques used to obtain
military secrets could be turned to complex commercial technologies or
strategies without too much difficulty.

Dissemination

Although dissemination presents difficulties, the argument can be
overplayed. In fact, some would argue the intelligence dissemination issue is
no different than distribution questions involving other government benefits,
such as subsidies, that are rarely distributed in a egalitarian manner. In most
cases the dissemination issue would be dealt with prior to tasking. An
intelligence service would not likely pursue a piece of information or
technology absent any idea of what to do with it once obtained.

Distribution problems relating to competition between firms can be further
mitigated to the extent that government-led consortia are used as the conduit
through which government supplies intelligence gained through economic
espionage. Government-led consortia, whereby firms receive government support
while working together, are common in Europe and Asia and appear to be gaining
popularity in North America. For example, the three major American auto
manufacturers compete ferociously for market share, but the Clinton
administration has brought the "Big Three" together in a
government-sponsored consortium called "U.S. Car". Within the
consortium all three will have access to previously top secret government
technology and will pool their resources to develop pre-commercial technology
for the car of the future. Furthermore, the existence of numerous
high-technology research consortia that limit membership according to company
nationality indicates that another often raised issuethe difficulty of
determining the nationality of corporationsmay not be the problem some
think it is.

On the other hand, the existence of means to reduce dissemination
difficulties will not erase them. Problems will inevitably arise. Those
countries considering engaging in or expanding their practice of economic
espionage would be well-advised to consider the alleged experience of France in
this area. It has recently been suggested that the embarrassing release of
information indicating French intelligence service targeting of American
companies, which triggered an American boycott of the Paris Airshow, was the
work of disgruntled French firms. The companies responsible for releasing the
material to the press apparently were unhappy with what they saw as the French
intelligence service's (DGSE's) tendency to favour some French firms over others
in distributing material obtained through economic espionage. The incident
reportedly cooled relations between the DGSE and certain elements of French
industry.

The shift toward Asia

While North American coverage has promulgated the view of its companies as
victims of economic espionage, the perception of primary practioners is
beginning to change. Early on, the French and the Russians were presented in
most North American analyses as the primary practioners of economic espionage.
Now, in a realignment perhaps more attuned to today's geopolitical realities,
this dubious status is being transferred to the Japanese and emerging Asian
economies. In a recent article in the Far Eastern Economic Review, FBI
officials stated 57 countries are running operations to obtain information out
of Silicon Valley. These same officials were quoted as labelling Asian
governments and multinationals, particularly Japan, Taiwan and South Korea, as
the chief culprits. Michael J. Yamaguchi, identified as the American
government's top prosecutor in San Francisco, stated that "the biggest fear
we have is the Pacific Rim countries". Recent statements on perceived
origins of incidents of both industrial and economic espionage released by the
Canadian Security Intelligence Service mirror these concerns.

This shift in focus may also encourage a reassessment of the link to foreign
governments typically required by domestic intelligence services before
investigating economic espionage. Corporate links with government, always
difficult to discern in economic espionage cases, become even more so when
Western intelligence services find themselves faced with Asian firms. In many
cases, Asian firms' links to government, although substantial, are far more
fluid than the relationships between some of Europe's state-owned corporations
and their governments. The prospect of huge Asian multinational corporations,
with their definite but elusive relationship with government, engaging in
industrial or economic espionage, may open new debates on when and how
intelligence services should intervene in these cases. For while European
states move towards privatization (albeit retaining a "golden share")
in many cases there is little sign of a lessening of links between business and
government in the high growth communitarian societies of Asia. The imminent
emergence of powerful Chinese multinationals out of the so-called "socialist
market economy" of China will only increase this trend.

Legal issues

While economic espionage is considered a threat to national security, it,
like other forms of espionage, does not necessarily involve an illegal act. The
legal grey zone within which economic espionage is practised explains to a
certain extent why countering this activity is the province of intelligence
services rather than enforcement agencies such as the police.

Furthermore, the current increased focus on industrial and economic
espionage has forced many industrialized countries to recognize that their
current legal régimes are inadequate to deal with several aspects of the
problem. For example, it came as a shock to many in Britain to learn that a
large firm which admitted carrying out a three-year operation including
surveillance of its rival's directors, trash and briefcase searches and actually
planting a mole at their competitor's head offices had, under current British
law, done nothing illegal. Partially in response to this case and others,
Michael Howard, the Home Secretary, announced in April 1994 the introduction of
legislation to crack down on private surveillance and industrial/economic
espionage. The proposed legislation would make it an offence to gain
information through deception. This will put tremendous pressure on practioners
of economic and industrial espionage who rely heavily on the popular "pretext
call" technique whereby the caller elicits information by pretending to be
someone else.

The problems posed by the uncertain legal status of most espionage
techniques has also been recognized by David L. Boren, former Chairman of
America's Senate Select Committee on Intelligence. Boren has noted that "current
laws need to be reviewed since most penalties apply only to the theft of
government military secrets".

Reacting to a similar concern regarding gaps in its own legal structure, the
French government recently passed a new criminal law. Effective 1 March 1994,
it contains several articles whose enactment was reportedly encouraged by the
French intelligence community. The law expands the definition of spying from
just military and political matters to include industrial and commercial
matters. Significantly, the description of what the espionage law sought to
protect was changed from "national defence interests" to "fundamental
interests of the nation". The coverage of the law was also expanded from
just "foreign powers and their agents" to include organizations such
as the Mafia and foreign businesses.

This is a clear statement that the French intelligence community has a
strong mandate to counter foreign corporations that threaten national security,
broadly defined. This will be the case regardless of their link to a foreign
government. The new law reportedly makes even some open-source
information-collection illegal. Consequently, it has been criticized by some as
uncomfortably similar to legislation such as China's state secret law, which
leaves authorities with arbitrary powers to interpret what is or is not a state
secret.

Other sharp practices

As noted earlier, economic espionage can be considered a subset of a broader
category of what have been termed sharp practices. Recently, there has been
some discussion, particularly in the USA, of the intelligence community's role
in dealing with sharp practices other than economic espionage.

The United States is the only member of the Organization for Economic
Cooperation and Development (OECD) to pass legislationthe Foreign
Corrupt Practices Actcriminalizing the payment of a bribe to a foreign
official. The legislation arose out of the American bribery scandals of the
1970s. These restraints, which are extraterritorial in scope, have proven a
constant irritant to Americans doing business abroad. According to Secretary of
State Warren Christopher, the legislation costs American companies "hundreds
of millions of dollars in contracts every year". Not surprisingly, the USA
is particularly upset about the practice engaged in by some countries of not
only turning a blind eye to bribery by their own nationals but recognizing these
same bribes as tax-deductible business expenses. The Clinton administration has
not been encouraged by progress in lobbying fellow OECD members to pass domestic
legislation mirroring America's, or to agree to an enforceable international
code condemning the practice. In the absence of any international support for
these initiatives, American commercial interests have been pressuring their
government either to change the international regime or to rescind the
legislation. Unwilling to rescind, the Clinton administration turned to the
CIA.

CIA Director James Woolsey recently stated that the CIA would
enthusiastically fulfil its role of monitoring sharp business practices abroad.
In response to questions on this issue Woolsey replied, "We are in the
business of understanding when other countries and foreign companiessome
of these countries quite friendly to the United States otherwiseare
engaged in bribery in order to take contracts away from American corporations.
We spend a great deal of time and effort trying to help the Secretary of State
and the Secretary of Commerce be able to level that playing field." The
way this reportedly functions is that after being informed by the CIA, State or
Commerce officials contact the relevant foreign government in an attempt to
ensure this activity does not distort the decision-making process. Woolsey also
mentioned that this work has saved American companies billions in sales that
otherwise would have been lost due to bribery of foreign officials and added, "Most
such companies never realize they have received our assistance and even state
publicly they don't need it ... That's fine with us. That's the nature of the
intelligence business." Savings in the billions from this sort of activity
by the CIA may not be as fantastic as it seems. Foreign governments often make
purchases of telecommunications systems, aircraft or arms that frequently amount
to such sums.

Inevitably the CIA, in pursuing this mandate, will have to use other than
open means to determine if this activity is going on. It is unclear how foreign
intelligence services whose companies are targeted by these investigations will
react. Another troublesome issue is whether the CIA would be compelled to turn
in an American company they discovered breaching the provisions of theForeign
Corrupt Practices Act.

Finally, the decision to use the CIA in assisting the implementation of the
extraterritorial application of American laws dealing with one category of sharp
practices raises the question of whether CIA resources will be used to assist
the implementation of others; for example, American competition laws.

Telecommunication interception & computer system vulnerability

SIGINT: the "atomic bomb" of economic espionage

Perhaps the most important comparative advantage certain governments have in
practicing economic espionage is their signals intelligence (SIGINT) ability.
Their considerable capacity to target, intercept and decode private and
confidential communications poses a serious threat to the communications
security of both government and business. The same technical infrastructure
used to collect military and political information about hostile nations during
the Cold War can be focused just as easily on an important trans-Atlantic
telephone conversation between two executives. The former head of the French
intelligence service, Pierre Marion has described with characteristic reticence,
the unsurpassed American SIGINT capacity as the "atomic bomb" of
economic espionage.

In a world where NFL coaches routinely encrypt messages radioed to their
quarterbacks, the potential of this worldwide telecommunications interception
network has not gone unnoticed. Jim Royer, of Chicago's FMC Corp., producer of
the M-3 Bradley fighting vehicle as well as industrial chemicals, conveys the
view of many large corporations when he says, "We can handle the ordinary
industrial spy, but we don't have the technology or know-how to combat the type
of advanced technologies governments can throw at us. For example, spy
satellites and sophisticated strategic espionage ... only government can combat
that." These concerns were echoed by James E. Riesback, executive
vice-president of Corning, Inc. In testimony before a US committee, Riesback
stated, "Our intelligence agencies must become partners with US industry in
providing secure, enhanced telecommunications services on an international basis".
Riesback's concern was such that he proposed government agencies consider, as a
"short-term option", "establishing a secure overseas pipeline for
use by businesses seeking to communicate proprietary information to their
foreign operations". Riesback's concerns appear to be supported by many
recent reports of economic espionage where SIGINT was employed.

Beyond traditional telecommunication traffic, the development of one of the
newest modes of communication and its infrastructure has, predictably,
instigated a debate concerning what access government intelligence agencies
should be given to its operations. The American "clipper chip"
proposal would enable governments to monitor more easily the communications
darting across the information superhighway. A parallel proposal is being
examined in Canada, where proposed legislation described by RCMP spokesmen as "similar
to the law the US is putting in place" is being reviewed.

Those in favour of ensuring government's capacity to eavesdrop on new
communication conduits argue the need to combat organized crime and terrorism.
Yet the wealth of economic intelligence to be gleaned from this new
core-communication pathway leaves many concerned that governments with access to
this global network will use it for economic espionage.

Accusations of computer systems with trap doors, economic espionage and
intelligence services are not new. Thomson's International Banking
Regulator, a banking industry publication, recently reported that the
National Security Agency (NSA) had been accused of getting confidential
information from the World Bank and other international banks via a software
trap door the banks did not know existed. An investigation by an American House
Judiciary Committee in 1992 concluded there was substantive evidence that
software with the alleged trap door was illegally sold during the 1980s. Not
surprisingly, the Information Security Business Advisory Group (Ibag), a
European business group, has warned European governments to ignore American
calls to restrict the use of the information superhighway to users whose
encryptions can be broken by government agencies. Concerns of this nature in
both Europe and Asia have led some to speculate that instead of one global
system, three regional systems paralleling what could be described as European,
North American and Asian trading blocs, will emerge.

The idea of regionalized information highways fits neatly with the prospect
raised in the earlier Commentary of a eventual segmentation and
interaction of intelligence communities to better reflect the economic
interests of regional trade groupings. We exist today with a military/political
structure inherited from the Cold War resting awkwardly on a dynamic world
market where new economic alliances strain traditional military/political ties.
The clearest public acknowledgement of this growing linkage of economic and
security interests with trading blocs can be found in France's recently
published global military review. The document, with which France hopes to
influence the European security agenda, recognizes both that security is now
defined less in terms of territory than economic and industrial interests and
that France's vital interests, particularly at the economic and industrial
level, are `barely dissociable' from those of fellow EU members.

The Western European Union (WEU) was selected as the medium to promote this
common European security policy. According to the document, the WEU, often
described as the weak cousin of NATO, must acquire strategic autonomy in a
number of areas including "intelligence". The paper calls for the
development of common intelligence structures and a consequent reduction of
Europe's dependence on American intelligence resources. The USA and Canada are
not members of the WEU.

Interestingly, there has recently been some friction between the American
intelligence community and European officials regarding information-sharing in
the Volkswagen-General Motors industrial espionage case. The increasingly
byzantine case involving accusations that VW officials stole commercial secrets
from GM's Opel Division in Europe has drawn the attention of governments on both
sides of the Atlantic. Ron Brown, US Commerce Secretary, said the dispute had
the potential to disrupt relations between Germany and the USA if German
authorities did not quickly become more co-operative with FBI officials
conducting a parallel investigation into the affair. Reported attempts by
Gerhard Schroeder, the Prime Minister of Lower Saxony and effective holder of
that state's 20% interest in VW, to have the case against the company he is
part-owner of thrown out of the German courts, may have motivated this very
public intervention by Brown.

Conclusion

While intelligence services' approach to major mandates such as terrorism
and proliferation are relatively set, the same cannot be said for economic
espionage and other sharp practices. With governments around the world focusing
on the pursuit of economic and commercial interests, issues raised by the
interface of commercial interests and intelligence will continue, welcome or
not, to press in upon intelligence services and policy-makers. Only by better
understanding the issue and its complexity will proper decisions be made in this
area, and better understanding can only be obtained through better analysis.

The views expressed herein are those of the author, who may be contacted by
writing to :